I know it is not easy, it can even be very confusing at times, but the economy is not as complicated as many people make it out to be. We know that the economy as we knew it 50 years ago looks completely different today, but the global economy operates on the same basis, with clarity and conviction, but that does not mean economies will always be strong.
In recent years most of the world's prominent central banks have been engaged in aggressive monetary easing policies. Whether they call those QE programs or ESM programs, or something else, it really doesn't matter. In an effort to prevent a collapse our central banks have been printing money in what seems sometimes like harmonic unison.
In doing so this effort appeals to some investors because those often translate to short-term moves in the stock market, but the influence of these monetary easing policies is often misconstrued. Partly because the mandate of the Federal Reserve is also full employment, many people believe that these bond buying programs are being done to help the economy grow, but easing monetary policy more than it is already has little or no effect on economic growth.
However, monetary policy in other parts of the world is still having an impact like the first QE program in the United States did. The influence of our first effort was to protect and shelter the economy from what would have been an utter collapse in the debt market. This is an integral part of our global economic model, but after debt markets are stabilized the influence of these easing programs is diminished significantly.
Unfortunately, and partly because the government wants everyone to invest in the stock market apparently, investors are also being coerced into believing that the Federal reserve's continued and seemingly endless monetary infusions are going to do more than just stabilize the debt market. With interest rates having been at zero for what seems like an eternity already, and with no end in sight, money is already about as cheap as it can get. When interest rates were still a tool the Federal Reserve had much more power than it does today, but at least for now those days are over.
The Federal Reserve does not have the bullets it did just a handful of years ago; they have done absolutely everything they can, and given the most recent QE3 program they are now officially all in. Before this was official their influence had been substantially reduced anyway, they had done their job and stabilized the debt market and they gave the economy the chance to recover, but additional monetary policy cannot influence economic growth when interest rates are already at zero and liquidity is already at record highs. For some people, looking at this more mechanically will help this resonate.
When I say mechanical, I mean literally, think about an old automobile engine, not the engines in the cars we own today, but the engines in those old muscle cars, the ones with four barrel carburetors, real Pistons, and all kinds of moving parts. Assume you have restored that old engine to run as best as it can, but you wanted it to do more so you started adding more and more oil to the system. Your thought was that the more oil you added the smoother that engine would run and the faster that car would go, but eventually adding too much oil would cause oil to begin dripping to the ground, it would have no influence on performance, and you might even run the risk of allowing that oil to seep into parts of the engine that it does not belong, which would eventually cause significant damage and reverse all the effort you made in repairing the engine in the first place.
In effect, our federal reserve is running the risk of damaging our economy, but more importantly to me they are also confusing investors and enticing them to make bad decisions in an economic environment that is naturally weak.
The Federal Reserve has already done their part, their influence was felt years ago, and they no longer have the bullets they need to make a difference. They have stabilized the debt market, they have provided liquidity, and they have given the economy its rightful ability to operate in a more natural way.
Although this might confuse some people, in the years leading up to these aggressive monetary infusions our governments also incurred massive amounts of debt so in my opinion the monetary infusions are simply balancing those very poor fiscal policies from years before. This allows the economy to act more normally, but it also causes severe confusion because investors then believe that the economy is free to be healthy again, but that is not the natural state of our economy at this time.
The natural state of our economy, if there were no debt issues or lingering fiscal cliffs, would be exactly like it was in the Great Depression and the stagflation period of the 1970s. When all other distractions and noise are removed and the economy is evaluated on its most simplistic terms the natural state of our longer term economic cycle suggests that we are in the third major down period in US history and it has nothing to do with debt. Debt, taxes, lower government spending, these are all headwinds in an environment that is already naturally weak, and there is nothing they can do to stop it.
The investment rate is one of the most accurate leading longer-term stock market and economic indicators ever developed and it proves that this economic weakness is natural, it explains why this is like the Great Depression and stagflation, and it tells us exactly how long it will last. For people interested in the economy, and for business owners who need to understand future economic cycles before they happen, The Investment Rate can be found on Stock Traders Daily.